BskyB acquisitions in Italia and Deutschland : a transaction for 21st Century Fox or for BskyB shareholders?

ECGS concerns about BskyB acquisitions to be voted on 6 October 2014: financial valuation and conflicts of interests…

On 6 October 2014 BSkyB will hold an Extraordinary General Meeting in order to seek shareholder approval for the proposed Acquisitions of Sky Italia and Sky Deutschland. The Acquisitions will cost BSkyBan aggregate consideration that of to up to £7.4 billion which the Company intends to finance through a combination of new debt, Notes Offering, existing cash resources and the disposal of National Geographic Channel.

BSkyB’s Board states that the proposed acquisitions will enhance the Company’s long-term growth prospects, as Sky Deutschland and Sky Italia have a significant opportunity to capitalise on the subscriber and product penetration potential. The Board also believes that the acquisitions will bring long-term benefits to BSkyB’s investors thanks to, inter alia, the complementary of the businesses involved, with shared brand and similar culture, with synergies expected to amount to approximately £2 billion in capitalised value.

Within its proxy report about the upcoming BsktyB EGM ECGS agrees with BSkyB’s Board that strategically the Acquisitions seem to make sense given the expected customer headroom and potential product penetration. On the other hand, ECGS has concerns over the potential financial implications of the acquisitions as we note that both Sky Italia and Sky Deutschland reported losses for the past two years. ECGS has concerns over the £7.4 billion total consideration that BSkyB is prepared to pay, against potential capitalised synergies of approximately £2 billion. This leaves out approximately £5 billion who will need to be created just to match costs and benefits from the Acquisitions of two companies which posted significant losses over the past two years.

There are further concerns over the partial financing of the Acquisitions through an Equity Placing representing 9.99% of the Capital of the Company and not through a Rights Issue, which would have allowed all shareholders to avoid dilution of their holding. However, 21st Century Fox was issued Placing Shares to maintain its 39.14% shareholding. This means that minority shareholders have been discriminated against concerning this specific matter.

Finally, ECGS is concerned over a number of potential conflict of interest at level of BSkyB’s Board and its key shareholder, the Murdoch Family. The Murdoch family is the largest shareholder of both BSkyB and 21st Century Fox, which leads to uncertainty as to which side of the proposed Acquisitions the Murdoch will favour. Furthermore, five BSkyB’s directors are affiliated with 21st Century Fox.

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